No organization has unlimited resources to chase every opportunity. In most cases, they have to select the best option. To do so, they use so-called project selection methods to select the right project to proceed with.
Project selection models help select the least risky option for maximum profit and brand recognition.
You may not play any role in the selection process as a project manager; however, you should know why the project was selected and how it fits into the organization’s strategic objectives.
What is Project Selection in Project Management?
Project selection in project management is the process of selecting the project among many projects that align best with the organization’s objective and results in the highest return with minimal risks.
It is a critical process for an organization, as a wrong decision can jeopardize its growth.
Project Selection Methods
You can divide project selection techniques into two categories:
- Benefit Measurement Methods
- Constrained Optimization Methods
Project selection methods vary in complexity, but the goal is to help organizations select a project that results in maximum profit and positive recognition.
Every organization has a defined process that helps them choose the projects that align with their business objectives.
1. Benefit Measurement Methods
The benefit measurement methods are the more popular project selection methods based on the present value of estimated cash inflow and outflow. Here, you calculate and compare the costs and benefits of all potential projects.
The following are examples of benefits measurement methods:
- Benefit/Cost Ratio
- Economic Value Added
- Scoring Model
- Payback Period
- Net Present Value
- Internal Rate of Return
- Opportunity Cost
Before we discuss these techniques, you need to understand the discounted cash flow.
Discounted Cash Flow
The value of money received today is more than that which will be received in the future.
For example, the value of 10,000 USD after ten years will be lower than the current value of 10,000 USD.
This phenomenon is known as discounted cash flow.
Therefore, consider discounted cash flow while calculating the return on investment.
Now, let’s return to the benefits measurement methods.
Benefit-Cost Ratio (BCR): Many experts call this technique the cost-benefit ratio. It is the ratio between the present value of inflow (cost invested in the project) and the present value of outflow (value of return from the project). You should choose the project with a higher BCR.
Economic Value Added (EVA): EVA is a performance metric calculating the value created for the organization. It defines the Return on Capital (ROC) and is the net profit after deducting all taxes and capital expenditures.
You should choose the project with the higher EVA if you have several projects. Please note that the economic value added is expressed in dollars, not as a percentage.
This technique is also known as the economic model.
Scoring Model: Here, the project selection committee will list a few relevant criteria and consider them in terms of importance. Afterward, they will assign marks for these criteria. Finally, the committee will count the marks and get a final score.
The project with the highest score is selected.
Payback Period: This is the time required to recover the cost invested in the project. If other parameters are equal, you will select the project with a minimal payback period.
Net Present Value (NPV): This is the difference between the current value of cash inflow and the current value of the cash outflow of the project. NPV should always be positive, and the project with the highest value is the better option.
Internal Rate of Return (IRR): This is the interest rate at which the net present value becomes zero. In other words, it is the rate at which the present value of the outflow is equal to the present value of inflow. You should choose the project with the highest IRR.
Opportunity Cost: This is what you lose by choosing another project. You should choose the project with the lower opportunity cost if you have several options to choose from.
These are a few of the benefits measurement techniques organizations can use in project selection.
#2. Constraints Optimization Methods
This is also known as the mathematical selection model and is used for large projects requiring complex calculations.
The following are a few constraints optimization techniques:
- Linear Programming
- Non-linear Programming
- Integer Programming
- Dynamic Programming
A detailed discussion of these topics is outside the scope of the PMP certification exam; knowing the name of these techniques is enough.
What is the project Selection Process?
A project selection process involves the following steps:
- Create a List of Projects: Firstly, identify potential projects and make a list of such projects. You will mention key project details such as budget, duration, resource requirements, project benefits, etc.
- Compare the Projects: Compare all relevant projects using the project selection techniques discussed above and determine which project is more beneficial for the organization.
- Analyze the Results: Now, the organization will analyze all results. The analysis will be based on objective findings and ratings.
- Select the Project: Finally, the organization will select the best project.
Important Factors in Project Selection Methods
The following are key factors in a project selection process:
- Funding: Funding or budget is a key consideration in project selection. If a project requires more funding than is available to the organization, they won’t go for it.
- Time: Time is another critical factor. The organization may not want to hold funding if the project duration is long.
- Risk: No one wants to proceed with a risky project.
- Resources: Does the organization have the necessary resources to complete the project?
- Skills: Does the organization have the necessary skills to complete the project? Have they worked on a similar project in the past or not?
The Importance of the Project Selection Process
Project selection is key to organizational growth. Choosing the wrong project can affect business growth. It will likely drain the organization’s funding, and the organization will miss out on the opportunity to select the right project for their needs. Furthermore, it will likely result in the loss of resources and negatively affect brand recognition.
The project selection method uses scientifically proven techniques to select projects that align with the organization’s objective, culture, available skills, and resources.
These factors ensure the selected project is successful.
Roles in Project Selection
Upper management, the steering committee, the Project Management Office (PMO), the project selection committee, or any other equivalent group of stakeholders use project selection methods to select the project.
They will consider various criteria, such as:
- Whether they have the technical expertise to complete it.
- If they have the resources required.
- If the project will help them achieve their objectives.
Role of the Project Manager in Project Selection
Top management and business analysts carry out the project selection activities, and the project manager has no direct role in this process.
However, managers and analysts often lack unique experience in managing projects. So, they may be required to provide input to the project selection process. They know what skills and resources are required by the project and whether the organization has these skills or not.
They can present the benefits and disadvantages of a project.
Summary
Project selection methods are vital for organizations. The right project helps an organization grow its business and earn recognition.
Project selection techniques help you choose the right project with a better return on investment. Benefits measurement methods are sufficient for most organizations to reach a decision. You will use constraint optimization methods for large and complex projects.
This is an important topic for the PMP exam; you may see a few questions.
This is an important topic for the PMP exam; you may see a few questions on it.
I am Mohammad Fahad Usmani, B.E. PMP, PMI-RMP. I have been blogging on project management topics since 2011. To date, thousands of professionals have passed the PMP exam using my resources.
very details explanation , many thanks
Thanks, Mr. Fahad, this post is very elucidative. Can you help me with a question? What are your sources? I have searched about project selection in the PMBOK Guide and I didn’t find any relevant information.
Can I find any practical issue in case of selection, Sir?
Hello Moushik, I did not understand your question.
Hello, amazing blog that I just stumbled upon 3 days before my exam! I am taking the PMP exam and been studying intensively for 2 weeks (and months on and off before that)
I just have one question concerning the opportunity cost. One of the mock exams I did had the question of the opportunity cost while selecting project B out of A (250k$), B(200k$) and C(150K$). The answer was 250K$ which I assumed was the highest value of a set of projects( A and C). Can you please confirm?
WHERE CAN I FIND SOME SOLVED EXAMPLES FOR PRESENT VALUE, NET PRESENT VALUE, BENEFITS/COST RATIO, EARNED VALUE MANAGEMENT, INTERNAL RATE OF RETURN, PAYBACK PERIOD.
You can find them here:
https://pmstudycircle.com/pmp-formula-guide/
thanks for this write up. please can you assist me with a project management textbook i can have the pdf
Please look for some online store; e.g. smashwords, amazon or B&N.
Thanx bro this nots very useful to me.
You are welcome Aakash.
Am preparing for the exam and you articles are like executive, insightful summaries for me! Thanks
You are welcome Solexmon.
Which type of organization structure are for medium engineering unit.
Organization structure is for an organization, not for a unit.
Is there an Excel template that you can share for Project scoring methodology / technique, which captures all these factors.
Sorry Rakesh, I don’t have it.
This is a very good site. I have been to many other sites and have found this one to be most helpful!
Thanks for all your help brother.
Kind regards and make it a wonderful day.
Thanks Christopher for visiting and leaving your comment.
HI, Could you please explain how can I calculate EIRR/FIRR/NPV/BCR of a development project? Suppose,
the project term-2 years, Project cost -!00 M USD. Components-road construction-50 KM, Drainage-5 kms, bridge-250 meter, project contigency(manpower+utility+equipment)=2M USD.
Regards
I doubt you will see these type of questions in the PMP exam.
Excellent explanation!!. Thanks a lot Mr. Fahad.
You are welcome Gurender.
Thank you so much
You are welcome Motasem.
Thank you so much, this information really helped me with my assignment, really grateful, and appreciate you a lot, thanks so much once again
Thanks Kribz for your comment.
Thank you so much for your help here! We are planning for the test here in California and found no other site as useful!
You are welcome Devon.
Why we chose lesser opportunity cost although we are giving it up and choose other cost.
Please explain with examples.
Thanks
You will select the project which gives you high profit and recognition and leave the project which gives you lower profit.
Hello,
Can anyone tell me how to use linear programming to select project in capital budgeting? Please. Kindly email me in detail. Please
Hope below given article will help you
http://ruby.fgcu.edu/courses/tharring/10183/m8_notes.htm
Brother you are doing a nice work
God bless you
Thanks Akhtar.
thanks.your note really helped me. feel appreciated.the least I can do
You are welcome Guyo.
Precisely Helpful
Thanks Asad for your visit and comment.
Nicely explained, easy to grasp the concepts, Thank you!
Thanks Chandresh.
Opportunity cost is not clear to me…can u pls explain? You mentioned lesser opportunity cost we will choose that project….how? can u pls clarify?
If you chose one project A over project B. The cost of project B is opportunity cost
What is you have to choose between project A (100,000), project b(150,000) or project C(200,000)?
This information is insufficient.
Any above is fine.
This was really helpful and easy to understand,
thank you !
You are welcome Amel.
Thank you, this is very helpful
You are welcome Basem.
This is the very helpful notes for me very impressive and easy to understand and I am very thankful to the writer.
I am glad that you liked it Manahil.
Thank you, this was very well explained.
Thanks Joana for your comment.
Your site is a great place to learn and refresh PMP concepts who aspire to pass the exam. Especially referring to your site during last week of exam preparation, it helps clear many doubts faced while reading PMBOK Guide. Anyone who wishes to pass the PMP exam should focus on PMBOK Guide and this site.
Thanks for helping many aspiring PMPs!
Thanks Dinesh for visiting and leaving your comment.